Citi and B of A: Let's Try This Again

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The embarrassment from last year's banking stress tests wasn't the only reason Vikram Pandit was shown the door at Citigroup , but it didn't help. When everyone -- including your billionaire Saudi-prince investor -- is geared up for a higher dividend, and the Federal Reserve gives you the stiff arm, well, that doesn't help your ongoing employment prospects.

With Pandit out of the picture this year, it's less likely that there will be a major surprise from Citi. New CEO Mike Corbat vibes conservative, and it seems unlikely he'll overreach in his first go-round with the Fed. Investors are no less eager for dividends and share buybacks from Citi, but expectations have dimmed considerably versus this time last year.

Bank of America and CEO Brian Moynihan, on the other hand, will be back in the hot seat over the next few weeks. If Vik Pandit was the most recent victim of dashed dividend dreams during stress-test season, Moynihan wrote that song. Among Moynihan's many Bad News Bears-like bobbles during his early tenure was hyping up capital returns before being denied by the Fed.

Can we legitimately say this time is different? Consensus seems to be that we can. Among the B of A bulls is former bank bear Meredith Whitney, who said that the bank could "conservatively" quadruple its dividend. Outspoken bank analyst Dick Bove has likewise pushed the idea that B of A could be paying a significantly higher dividend. Moynihan, however, now knows better than to step too far out and has been cagey about the bank's capital plans heading into the stress tests.

Unfortunately for B of A shareholders, there's no quick-and-dirty view into which way the Fed will lean. While it's tempting to rely on actual, pre-test capital ratios, that would likely have led you to the wrong conclusions last time around.

Source: Federal Reserve; company filings.

JPMorgan Chase had a lower actual tier 1 common ratio than Citi in the third quarter of 2011. Yet it was waved ahead by the Fed and both boosted its dividend and announced hefty share buybacks. So it's not simply the pre-test ratio that matters, but the nature of the underlying assets and how they'll respond to the hypothetical stresses.

Still, it's undeniable that a major storyline at Bank of America over the past year has been its capital position. The bank has already surpassed new Basel III capital standards, even as the Basel Committee stepped back the timing on implementation. It's entirely reasonable for investors to think it has the ability to return some capital.

However, the right way to think about Moynihan and B of A this time around may be to look for signs of Moynihan's maturing as a CEO. A higher dividend or a share buyback approval may be great, but even more ideal for shareholders is evidence that Moynihan is finding a comfort zone and is able to walk the fine line between rewarding investors and feeding regulators' conservatism fetish. Finding that balance is certainly more ideal than pushing too hard for capital returns and getting denied, but it's also preferable to being too conservative and not pushing for any returns at all.

When the results are released, we'll get a look at the hypothetical stressed capital levels at each of the bank holding companies tested. Investors can then get a sense for how well Moynihan found a middle ground based on how the bank's stressed ratios stack up to its ilk. While a safer B of A is laudable, if its stressed ratios are among the highest, it stands to reason that Moynihan could have pushed for more for investors. Looking back to last year, JPMorgan stands as a reasonable model for success.

In the end, there will likely be very little nuance in the assessment of B of A's stress-test result. Either the bank will raise its dividend (and win) or it will continue to pay the symbolic penny-per-quarter (and lose). But however it turns out, when assessing Brian Moynihan, it's worth remembering that there's a heck of a lot in the gray area between those binary outcomes.

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